Overview
In June 2004 Santa Fe became one of three cities in the United States to pass a city-wide minimum wage applying to private businesses. The city’s increase to $8.50 an hour-a 65 percent increase-affected all businesses within city limits employing more the 25 people. The wage floor is scheduled to increase to $9.50 on January 1, 2006, to $10.50 on January 1, 2008, and then it will be indexed to inflation in the years following. With the wage hike in effect for nearly a year and a half-and with another increase to $9.50 on the horizon-it is appropriate to empirically assess the labor market affects of Santa Fe’s minimum wage.
This paper by Dr. Aaron Yelowitz, a respected labor and health economist at the University of Kentucky, builds upon an earlier work published in September, 2005. It extends the results of the original paper and addresses a number of unfounded criticisms made by supporters of minimum wage increases-specifically those by Drs. Robert Pollin and Jeanette Wicks-Lim.
Employment Effects
Using a “differences-in-differences” method of estimation that utilizes other areas of New Mexico to control for a variety of economic factors, this study finds that Santa Fe’s minimum wage had significant and negative effects on the labor market. Even more troubling, the study finds that the negative effects of the wage hike were concentrated on the least-skilled members of the economy-the very individuals the increase was intended to help.
Dr. Yelowitz found that the likelihood of unemployment for employees in Santa Fe went up by 3.3 percent. For less-educated employees, however, the results were much higher, with their likelihood of unemployment increasing 8.3 percentage points. In addition, the usual hours of work fell by 1.0 hours for the full sample and 3.2 hours for less-educated individuals. All of these results are statistically significant within a 95 percent confidence interval.
Displacement of Low-Skill Employees
If low-wage employees retained employment following the increase, one would expect a significant increase in wages in Santa Fe. Dr. Yelowitz estimated wage models and found that at the 10th percentile, 25th percentile, 50th percentile, and the mean, there were no statistically significant increases in the wage rate. This suggests the possibility that less skilled employees were replaced with more skilled employees-already earning more than $8.50 an hour. This would result in an increase in the likelihood of unemployment without increased wages. Dr. Yelowitz said, “I find strong evidence that the composition of workers changed after the ordinance.” Specifically, Dr. Yelowitz found that the likelihood that a low-skill employee was an unmarried teenager rose by 5.2 percentage points. Dr. Yelowitz went on to state, “although teenagers may have actually gained due to the ordinance, the distributional consequences were particularly harmful to less skilled adult workers – precisely the group for whom the ordinance is intended to help.”
Criticisms of Earlier Research
Dr. Yelowitz’s original research into the Santa Fe minimum wage drew criticism from Drs. Robert Pollin and Jeanette Wicks-Lim. This paper addresses these criticisms point by point. Importantly, Dr. Yelowitz highlights the fact that Pollin and Wicks-Lim-supporters of living wage and minimum wage increases-replicated his results and found that the Santa Fe minimum wage hike increased the likelihood of unemployment in the city. This marks the first time, to Dr. Yelowitz’s knowledge, that Pollin estimated significantly increased unemployment from an increase in the wage floor. .
Dr. Yelowitz also highlights the fact that a large number of the criticisms lodged by Pollin and Wicks-Lim disagree with earlier statements made by the authors. In particular, Pollin and Wicks-Lim criticize Yelowitz for not using labor force participation and employment-to-population, despite the fact that Pollin and Wicks-Lim explicitly reject using these measures in previous works. This paper documents the series of discrepancies in Pollin and Wicks-Lim work that casts serious doubt on the validity of their criticism.
Conclusion
This paper finds that Santa Fe’s living wage increase led to significant and negative consequences for employees in the city-particularly the least skilled employees. The increased likelihood of unemployment and a decreased number of hours worked were all highest for low-skill employees. Furthermore, there is significant evidence to suggest the displacement of adult employees by unmarried high school age employees. These are all unintended consequences that should give pause to any claims of success of the ordinance.
